Oil surges on optimistic Draghi comments

The Draghi Drag

Mr. Mario Draghi, head of the European Central Bank, drug the oil market out of its renewed bearish malaise with a promise to do whatever it takes to save the euro. Of course saying that and doing it are two different things. Oil was just shaking off its Iranian war fears and is now rallying on dreams of a massive global economic sugar high. Yet with Spain’s unemployment surging to decade’s highs, the market is becoming more skeptical that Mario Draghi has what it takes to do whatever it takes.

Still the charts are giving crude oil an upward bias so despite the pullback, it seems traders will be buying breaks. In other words, do not chase, be patient if you want to get long and participate in Draghi fever. That catchy as ever German Finance Minister Wolfgang Schaeuble said he welcomed a pledge by the head of the European Central Bank to take all necessary measures to save the euro. With Germany on board all we need is France and before you know it, we will have a coordinated bond buying party or maybe laying the ground work for one.

Refinery issues galore are giving RBOB a boost in the week after gas production hit the highest level since 2007. Still the key is oil and the EU which seems to be the driving force.

The Energy Information Administration is reporting that rail deliveries of oil and petroleum products is up 38% in the first half of 2012. The EIA says that railroads are playing a more important role in transporting U.S. crude oil to refineries, especially oil production from North Dakota's Bakken formation where there is limited pipeline infrastructure to move supplies. The amount of crude oil and petroleum products transported by U.S. railways during the first half of 2012 increased 38% from the same period in 2011, according to industry data.

The number of rail tanker cars hauling crude oil and petroleum products totaled close to 241,000 during January-June 2012 compared to 174,000 over the same period in 2011, according to the Association of American Railroads (AAR). Rail deliveries of crude oil and petroleum products in June alone jumped 51% to 42,000 tanker cars from a year earlier to an average weekly record high of 10,500 tanker cars for the month. One rail tanker car holds about 700 barrels. This would be equivalent to about 927,000 barrels per day (bbl/d) of oil and petroleum products shipped, on average, during the first half of 2012 versus 673,000 bbl/d in the same period in 2011, and June 2012 shipments were almost 980,000 bbl/d. In 2009, crude oil accounted for 3% of the combined deliveries in the oil and petroleum products category tracked by AAR. The trade group estimates crude oil now accounts for almost 30% of the rail deliveries in this category, and says that crude oil is responsible for nearly all of the recent growth.

Much of the growth in shipping oil by rail is due to the rise in North Dakota's oil production, which has more than tripled in the last three years. North Dakota surpassed California in December 2011 to become the third biggest oil producing state and took over the number two spot from Alaska in March 2012. Most crude oil is moved in the United States by pipeline. However, because of limited pipeline infrastructure in North Dakota's Bakken region, oil producing companies there rely on rail to move their barrels. Shipping oil by rail costs an average $10 per barrel to $15 per barrel nationwide, up to three times more expensive than the $5 per barrel it costs to move oil by pipeline, according to estimates from Wolfe Trahan, a New York City-based research firm that focuses on freight transportation costs. Wolfe Trahan also notes that using rail tank cars allows oil producers to separate grades of crude more easily and ensure their purity than when different oils are mixed in a pipeline.

About the Author

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.

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